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Recent reforms that would open oil exploration and development in Mexico to major oil companies for the first time in decades has the media all atwitter about the prospects of a reversal in declining Mexican oil output and a possible doubling of production. The reforms have brought out comparisons with Brazil which has a similar arrangement in which the country’s state-owned oil company works with major international oil giants to develop Brazil’s petroleum resources. Adding to the frothy atmosphere, former Brazilian President Luiz Inacio Lula da Silvaproposed a partnership between Mexico and Brazil to develop oil resources in both countries.
In a world with daily average oil prices hovering near record levels, such news might be welcome if only we could actually count on the accompanying optimistic production forecasts. But, it’s instructive to look at what actually happened in Brazil since the time its potential as a major new oil producer was touted several years ago.
Brazil had discovered large oil deposits in ultradeep (30,000 feet down) reservoirs far offshore. In 2009, Petroleo Brasileiro SA (Petrobras), Brazil’s state-owned oil company, announced that it would invest approxmately $175 billion in oil exploration over several years to boost Brazilian liquid fuel production from 2.4 million barrels per day (mbpd) in 2008 of oil, biofuels and other liquids to 4.6 mbpd in 2015, a move that would make the country a major oil exporter.
Let’s see what kind of progress Brazil has made so far. In 2012 the country produced 2.65 mbpd of liquid fuels, making hardly any progress toward the goal announced for 2015. (The figures for oil proper, that is crude oil plus lease condensate which is the definition of oil, were 1.81 mbpd in 2008 and 2.06 mbpd in 2012.) In fact, instead of contributing to the worldwide supply of exports, Brazil remains a net importer of oil according to the U.S. Energy Information Administration (EIA), and those imports grew from 36,470 barrels per day in 2011 to 155,040 barrels per day in 2012.
The large Brazilian oil company OGX Petróleo e Gas Participações SA filed for bankruptcy recently “after disappointing output from offshore OGX wells set off a crisis of investor confidence,” according to Reuters. It’s no surprise that state-owned Petrobras is also finding it far more difficult to exploit its deep sea oil resources than originally anticipated. Admittedly, there are other problems at Petrobras. It has become a tool of economic policy for keeping unemployment low, saddling it with investments that it might not otherwise have made as a private company. But that doesn’t change the fact that exploiting oil far offshore at extreme depths is difficult.
Mexico’s state-run oil monopoly, Petroleos Mexicanos (Pemex), has seen its production drop from 3.45 mbpd of crude oil proper in 2004 to just 2.59 mbpd in 2012 according the EIA. Reforms that will give international oil companies new access to Mexican oil fields are supposed to change that trend. It’s one thing to let private companies drill previously monopolized fields. It’s another to raise overall nationwide production significantly as a result. Just ask the Brazilians. The easy-to-get oil has already been harvested in Mexico and Brazil. The hard-to-get oil comes next, and well…it’s proving hard to get.
Will Mexico fare better than Brazil? Art Berman, a petroleum geologist and consultant who accurately forecast the bust for shale gas investors, offered this analysis in a recent email:
I have worked in Mexico since the early 1990s inside Pemex. There is a reason that no significant discoveries have been made since the 1970s–no reservoirs.
The Campeche Sound [in the Bay of Campeche] has reservoirs thanks to the biggest frack job ever, the Chicxulub meteor impact. The Golden Lane reef trend, discovered much earlier, has been fully explored with no new discoveries. Beyond that, almost nada.
The Eagle Ford Shale play [in Texas] extends into Mexico and, so far, all tests have yielded [natural] gas. There is a potential oil play in theTampico area from the El Abra Shale that sourced the Golden Lane. The Chicontepec tight calcarenite play contains huge oil [resources] that no one has figured out how to exploit commercially as recently as in the last few years. The deep-water Gulf of Mexico has serious reservoir problems in Mexico.
Add it all up and we are left with the same sense that there should be huge remaining undiscovered reserves in Mexico that an awful lot of smart foreign companies (Amoco, BP, Chevron, Exxon, Shell, etc.) have been unable to discover working closely [through service contracts] with Pemex since the 1980s.
As far as the Citi [Citigroup Inc.] estimates go [projecting a doubling of Mexican production which is mentioned and linked above], mucho ruido, pocos nueces (much ado about nothing; literally, lots of noise, no nuts).
Jeffrey Brown, an independent petroleum geologist best known for his Export Land Model weighed in as well on Mexico’s oil future. Brown’s model, first released publicly in 2006, correctly forecast shrinking global net exports of oil in recent years. He believes that any effect of the Mexican reforms will be relatively small and delayed several years. He related his views in a recent email:
Regarding their [Mexico’s] offshore potential, it’s going to take a long time to work out the agreements, drill some wells and put the wells on line. I wouldn’t expect to see any meaningful contributions from joint venture offshore projects until some time after 2020. Regarding onshore, [that] production could come on line sooner, but the agreements have to be made, and the per-well production rates are vastly lower than offshore. Also, I suspect that the production sharing agreements are going to be something more or less equivalent to a 50% royalty (or worse), versus much more favorable terms in Texas [which would make investment in Texas more attractive to major oil companies versus investment in Mexico].
Brown, who manages a joint venture exploration program based in Ft. Worth, also noted that “Mexico is on track to approach zero net oil exports in about six years (around 2019).” He continually reminds those making rosy predictions about oil exports for any exporting country that those countries tend to grow as oil revenues increase which means their thirst for oil also grows. That can leave less and less oil available over time for export. If the country’s production is in decline, as has been the case with Mexico, exports decrease much faster than production on a percentage basis if domestic consumption grows in the face of declining production–a sort of pincer movement on oil exports.
It’s possible that Mexico’s production may grow somewhat as a result of the country’s reforms. But, it is foolish to expect too much given what we’ve seen in Brazil to date. And, it is important to remember that production from currently producing Mexican wells is declining continuously making it necessary to drill a lot of wells just to maintain current production let alone increase it.
Anyone looking for oil exports or production from Mexico to reach their previous high marks would be wise to plan for a less than salutary result.
Plagued by almost a decade of slumping output that has degraded Mexico’s take from a $100-a-barrel oil market, President Enrique Pena Nieto is seeking an end to the state monopoly over one of the biggest crude resources in the Western Hemisphere. The doubling in Mexican oil output that Citigroup Inc. said may result from inviting international explorers to drill would be equivalent to adding anotherNigeria to world supply, or about 2.5 million barrels a day.
That boom would augment a supply surge from U.S. and Canadian wells that Exxon Mobil Corp. (XOM) predicts will vault North American production ahead of every OPEC member except Saudi Arabia within two years. With U.S. refineries already choking on more oil than they can process, producers from Exxon to ConocoPhillips are clamoring for repeal of the export restrictions that have outlawed most overseas sales of American crude for four decades.
“This is going to be a huge opportunity for any kind of player” in the energy sector, said Pablo Medina, a Latin American upstream analyst at Wood Mackenzie Ltd. in Houston. “All the companies are going to have to turn their heads and start analyzing Mexico.”
An influx of Mexican oil would contribute to a glut that is expected to lower the price of Brent crude, the benchmark for more than half the world’s crude that has averaged $108.62 a barrel this year, to as low as $88 a barrel in 2017, based on estimates from analysts in a Bloomberg survey. Five of the seven analysts who provided 2017 forecasts said prices would be lower than this year.
The revolution in shale drilling that boosted U.S. oil output to a 25-year high this month will allowNorth America to join the ranks of the world’s crude-exporting continents by 2040, Exxon said in its annual global energy forecast on Dec. 12. Europe and the Asia-Pacific region will be the sole crude import markets by that date, the Irving, Texas-based energy producer said.
Exxon’s forecast, compiled annually by a team of company economists, scientists and engineers, didn’t take into account any changes in Mexico, William Colton, the company’s vice president of strategic planning, said during a presentation at the Center for Strategic and International Studies in Washington on Dec. 12.
Opening Mexico’s oilfields to foreign investment would be “a win-win if ever there was one,” said Colton, who described the move as “very good for the people of Mexico and people everywhere in the world who use energy.”
$15 Billion Boost
The bill ending the state monopoly was approved by the Mexican Congress Dec. 12. Before becoming law, the proposal must be ratified by state assemblies, most of which are controlled by proponents of the reform. Oil companies will be offered production-sharing contracts, or licenses where they get ownership of the pumped oil and authority to book crude reserves for accounting purposes. The contracts will be overseen by government regulators.
Though some foreign companies already operate in Mexico under service contracts with Petroleos Mexicanos, or Pemex, the reform could increase foreign investment by as much as $15 billion annually and boost potential economic growth by half a percentage point, JPMorgan Chase & Co. said in a Nov. 28 report.
A doubling in production as suggested by Citigroup’s Ed Morse would put Mexican output at 5 million barrels a day, an unprecedented level for Pemex, the state oil company created during nationalization in 1938.
U.S. crude production will expand to 9.5 million barrels a day in 2016, the highest since the nation’s peak in 1970, the U.S. Energy Information Administration said today. That contrasts with last year’s EIA forecast that production would reach 7.5 million in 2019 before gradually declining to 6.1 million in 2040. U.S. output reached an all-time high 9.6 million in 1970.
A doubling of Mexico’s output maybe be slower to realize than the most bullish predictions as companies confront barriers in accessing capital and human resources needed for development, Riccardo Bertocco, a partner at Bain & Co. in Dallas.
An increase of 1 million barrels a day in output is the most realistic upper limit of what Mexico could achieve by 2025 based on the cost for new infrastructure, competition for new fields and opportunities all over the U.S., Bertocco said in a telephone interview Dec. 12.
“The opportunities are there, but they are still far from being materialized,” he said.
Drilling in Mexico will be held back by a lack of infrastructure, such as pipelines, in some of the potential shale developments. The government will need to decide on details for development such as tax rates, royalty structures and standards for booking reserves, Kurt Hallead, an analyst atRBC Capital Markets, wrote in a Dec. 12 note to clients.
It will take time to organize and conduct bidding rounds for licenses, and additional exploration, such as seismic tests, will need to be done, Hallead said.
“We are not expecting any significant impact from the reform to be felt in the next two years,” he wrote.
Foreign oil companies will face a backlash from Mexicans opposed to sharing the nation’s oil wealth, said Ricardo Monreal Avila of Movimiento Ciudadano Party, who sees the reform as violating Mexico’s constitution.
“We are going to see serious problems in the operations of these reforms. Indigenous communities and places chosen by foreign companies for extraction will not allow them on their property. There are going to be serious operational problems.”
Brent crude futures, the benchmark for more than half the world’s oil, rose as much as 1.8 percent to $110.80 a barrel in London today, the biggest intraday gain in two weeks, after Libyan rebels refused to relinquish control over oil ports to the central government. Libya, home to Africa’s largest proven reserves, has seen output tumble to the lowest since 2011 amid civil strife.
The first assets that will attract foreign investment will be mature oil fields drilled decades ago and reservoirs that need injections of steam or carbon dioxide to coax more crude out of the ground, Medina said. Deep-water prospects, shale and other technically challenging endeavors will follow later, he said.
The level of investor interest will be partly determined by which assets Pemex chooses to keep and which it will put up for auction, Medina said.
The Chicontepec field northeast of Mexico City may be among the richest prizes Pemex surrenders after its problems overcoming low pressure and disconnected crude deposits that have limited output, Medina said. Production that has averaged about 60,000 barrels a day may be increased to more than 100,000 by an international producer experienced in handling such fields, he said.
Chicontepec is just one of the over-budget, long-delayed projects for which Pemex will be eager to find partners, said Jose Antonio Prado, a former general counsel of Mexico’s energy ministry and Pemex official.
“The Mexican state will be able to incorporate private participants in projects that are already in force as well as new opportunities,” said Prado, now a partner at the law firm Holland & Knight LLP in Mexico City.
The reforms are especially important to open up exploration in Mexico’s deep-water fields, where additional capital, as well as better technology and expertise are needed, Carlos Solé, a Houston-based partner at Baker Botts LLP, said in a telephone interview. Pemex estimated the country’s deep-water Gulf of Mexico prospects may hold the equivalent of 26.6 billion barrels of crude.
Onshore, the potential is even greater with more than 60 billion untapped barrels, according to a Pemex presentation last month.
Some of the potential shale production sits across the border from Texas’s prolific Eagle Ford formation. The most resource-rich area studied so far is around the city of Tampico, a coastal city about 300 miles (480 kilometers) south of the bottom tip of the Texas border.
“I can’t tell you the amount of banks and investment funds coming from the U.S. and Europe that have been talking to us and are trying to have an expectation of what’s going to happen with the energy reform,” Prado said. “All those guys are going to be in Mexico next year in various forms trying to seek new opportunities.”
MEXICO CITY (Reuters) – Mexico’s Congress on Thursday overwhelmingly voted to open up the country’s oil and gas sector to private investment in the biggest overhaul of the industry since it was nationalized in 1938.
After a whirlwind final passage through Congress, President Enrique Pena Nieto’s bill will offer companies the chance to operate oil wells, commercialize crude and partner with state oil giant Pemex as Mexico seeks to revive flagging output.
Facing down accusations they were betraying their homeland to foreign oil majors, Mexico’s two biggest parties approved a series of changes to the constitution that could radically transform the fortunes of the world’s No. 10 oil producer.
At more than 10 billion barrels, Mexico has Latin America’s third-largest proven oil reserves after Venezuela and Brazil. It also has nearly 30 billion barrels of prospective resources in the country’s territorial deep waters of the Gulf of Mexico.
Pemex has struggled to exploit those reserves due to a lack of investment, a crippling tax burden and persistent allegations of corruption. Since peaking at 3.4 million barrels per day in 2004, Mexico’s crude output has fallen by more than a quarter.
Proponents of the reform argued Mexico would fall further behind its peers without finding new investors to help exploit its deep water and subterranean oil and shale reserves.
“Today, the name of the game is greater economic competitiveness,” Javier Trevino, a lawmaker in the ruling Institutional Revolutionary Party (PRI) on the lower house energy committee, said in a debate that went through the night.
END OF AN ERA?
Pena Nieto first presented his bill in August, and after weeks of negotiations with the center-right opposition National Action Party (PAN), the PRI unveiled a revised plan at the weekend in the Senate that was far more radical.
The new draft bore the stamp of the PAN, which had urged the government to offer companies full concessions at a time the president was only talking about profit-sharing contracts.
The revised bill did not go that far, but it opened up the prospect of production-sharing contracts and licenses, and both parties were keen to pass it this week.
Barely 24 hours had elapsed since Senate approval when PAN and PRI lower house deputies signed off on the reform, packed into a smaller chamber of the house after a group of left-wing Party of the Democratic Revolution (PRD) legislators tried to derail the reform by blocking access to the main floor.
Supported by the Green Party, a group allied to the PRI, lawmakers from the three parties gave final approval to the bill with 353 votes in favor and 134 against after rejecting a long list of objections to the bill argued by left-wing opponents.
Critics lamented the energy reform as an act of submission and the end of an era, tapping into the pride many Mexicans still feel over President Lazaro Cardenas’ move to expropriate foreign oil companies’ assets in 1938 and create Pemex.
“Today is a black day,” said Ricardo Monreal, a trenchant critic of the government and leader of the leftist Citizens’ Movement in the lower house. “More poverty for everyone, which has been the rule for Mexican privatizations.”
One leftist lawmaker stripped down to his underwear on the podium during the overnight debate, accusing the backers of the reform of leaving Mexico naked without its oil wealth.
OPENING THE DOOR
The floor of the lower house started to debate the bill just a few hours after it arrived from the Senate. In a swipe against the PRD and other left-wing lawmakers trying to derail the reform, legislators from the PRI, PAN and Green Party voted to bypass the committees usually consulted.
Following congressional approval, the constitutional changes must be ratified by a majority of the 32 regional assemblies in Mexico, most of which the PRI and the PAN control.
However, experts say the shake-up is some time away from yielding fruit, not least because the government must still draw up secondary legislation to implement the reform.
“They removed the lock from the door, but do you want to go through?” said Alberto Ramos, an economist at Goldman Sachs.
Seeking to lure billions of dollars to Mexico, the reform formally puts an end to Pemex’s monopoly in oil and gas and will offer companies the right to be paid in barrels of oil.
That is a big departure from the service contracts now on offer, in which firms are paid a fee and can recover costs.
But how lucrative the new regime will be is not yet clear.
“They still have to determine royalty rates and tax structures and national content requirements,” said Carlos Sole, an energy specialist with law firm Baker Botts in Houston.
“All that will determine the scope of potential investment,” he added. “But given Mexico’s market has been mostly closed to investment for so long, this is really a transformative change. The lion’s share of the excitement is on the upstream side.”
(Additional reporting by Gabriel Stargardter, Miguel Gutierrez, Ana Isabel Martinez, Tomas Sarmiento, Lizbeth Diaz, David Alire Garcia and Michael O’Boyle; Editing by Simon Gardner, Alden Bentley and Andrew Hay)